Perdoceo Education Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Perdoceo operates Colorado Technical University (CTU) and the American InterContinental University System (AIU), offering primarily online postsecondary education. AIU’s results include Trident University, acquired March 2, 2020; comparisons therefore include acquisition effects.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Revenue | $169.1 million | $155.0 million | $516.2 million | $469.3 million |
| Operating income | $32.1 million | $24.3 million | $106.7 million | $54.4 million |
| Operating margin | 19.0% | 15.7% | 20.7% | 11.6% |
| Net income | $39.9 million | $18.2 million | $97.2 million | $42.5 million |
| Diluted EPS | $0.56 | $0.25 | $1.36 | $0.59 |
| Cash provided by operating activities | Not provided separately for quarter | Not provided separately for quarter | $137.8 million | $85.4 million |
Quarterly revenue rose 9.1%; operating income rose 32.0%. Net income growth was amplified by a $16.0 million income-tax valuation-allowance release, which contributed to a Q3 tax benefit of $7.2 million versus a $7.7 million tax provision in Q3 2019. The Q3 effective tax rate was negative 22.0%; the year-to-date rate was 11.5%. Management attributed improved operating results to enrollment and revenue growth, lower prior-year legal settlement costs, and pandemic-related savings, partly offset by higher advertising, student-serving, share-based compensation and bad-debt costs.
Year-to-date cash from operations increased, with management citing improved results and $39.3 million of Title IV funds received in January 2020 that historically arrived in the prior year’s fourth quarter. Investing cash outflow was $167.5 million, including the Trident acquisition and net purchases of investments; financing cash outflow was $16.8 million, including $17.9 million of share repurchases.
Liquidity, debt and balance sheet
At September 30, 2020, cash, cash equivalents, restricted cash and short-term investments totaled $367.7 million, including $4.0 million restricted in acquisition-related escrow. Current assets were $416.9 million and current liabilities $98.5 million. The company reported no borrowings on its $50.0 million revolving credit facility; operating lease liabilities totaled $57.3 million. Management said existing liquidity and expected operating cash generation should cover anticipated needs for at least 12 months. The credit facility matures January 2022, is secured by cash and marketable securities, and has financial and restricted-payment covenants.
Net current student receivables declined to $37.6 million from $55.0 million at December 31, 2019. The student receivables allowance for credit losses was $40.7 million at September 30, 2020; year-to-date bad-debt expense was $36.7 million versus $32.0 million a year earlier.
Material changes and management commentary
- Total student enrollment increased 17.2% year over year to 43,000; Q3 new enrollments rose 17.5%. CTU total enrollment increased 4.8%, while AIU enrollment increased 37.7%, including Trident.
- CTU Q3 revenue rose 3.1% to $99.0 million and operating income rose to $33.0 million. AIU revenue rose 18.9% to $70.0 million, while operating income declined 24.9% to $5.5 million, with higher marketing and bad-debt costs cited.
- Perdoceo paid $43.8 million for Trident, funded from available cash. The acquisition added $31.0 million of goodwill and identifiable intangible assets; substantially all goodwill was expected to be tax deductible.
- Prior-year results included $7.1 million of Oregon arbitration expense in Q3 and $37.1 million of legal settlement expense year to date, including FTC-related costs. These items materially affect year-over-year operating-income comparisons.
- The company repurchased 1.3 million shares year to date for $17.9 million, with approximately $28.2 million remaining under the $50.0 million authorization at quarter-end.
Outlook, risks and contingencies
Management’s updated 2020 outlook projected full-year operating income of $137.5–$139.0 million, adjusted operating income of $154.0–$155.5 million, diluted EPS of $1.69–$1.71 and adjusted diluted EPS of $1.51–$1.53. Q4 outlook was operating income of $30.8–$32.3 million and diluted EPS of $0.33–$0.34. The outlook assumed continued enrollment growth, no material regulatory or legal changes, no significant additional COVID-19 effects, and an effective tax rate of approximately 15% for the full year. These are management estimates, not guarantees.
Management reported no material operating disruption from COVID-19 through the quarter, but noted uncertainty around student demand, collections, corporate partners, remote-work technology and cybersecurity. The company depends materially on federal Title IV funding; approximately 79% of 2019 tuition cash receipts came from Title IV sources. Regulatory, accreditation, cohort-default, borrower-defense and state requirements remain significant risks. Both institutions’ 2017 three-year cohort default rates were below 30% and improved from 2016.
Accrued estimated legal fees and settlements were $0.3 million at quarter-end, compared with $7.3 million at year-end 2019. The filing describes government information requests and other claims, including student, consumer-protection and employment matters; management said outcomes are uncertain and an unfavorable result could materially affect the business. The proposed borrower-defense class settlement was denied approval in October 2020 and litigation discovery resumed. The company also retained a $29.0 million valuation allowance against remaining foreign tax credits and state net operating losses.
Most important facts for investors to verify
- How much of AIU’s enrollment and revenue growth reflects Trident versus organic growth, and how successfully the integration proceeds.
- Whether higher bad-debt expense and the student receivables allowance adequately reflect collection risk and student financial-aid completion trends.
- Whether the $16.0 million tax valuation-allowance release and expected foreign tax credit utilization are realized as anticipated.
- Whether Title IV funding, regulatory requirements, borrower-defense matters or other litigation create additional operating costs, liabilities or liquidity needs.
- Whether enrollment, COVID-19 conditions and the stated tax and operating assumptions support management’s full-year guidance.
- Whether operating cash flow remains strong after accounting for timing differences in Title IV receipts, acquisition spending and share repurchases.